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Chinese shares tumbled on Friday, after the country's securities market regulator said it had opened an investigation into suspected market manipulation as Beijing struggles to head off a full-blown crash that could damage an already slowing economy.

After a slump of more than 20 percent in Chinese stocks since mid-June, the China Securities Regulatory Commission (CSRC) has set up a team to look at "clues of illegal manipulation across markets".

The China Daily newspaper said on Friday that the CSRC was probing investors who used stock index futures to "short" the market, or bet on prices falling.

News of the probe did nothing to arrest the sell-off that has become a major worry for global investors, who fear a meltdown in China's highly leveraged stock market could destabilize the world's second-largest economy.

The CSI300 index of the largest listed companies in Shanghai and Shenzhen dropped 3 percent in early trading, while the Shanghai Composite Index shed 4 percent.

The Shanghai benchmark had slumped below 4,000 points on Thursday for the first time since April - a key support level that analysts had expected Beijing to defend.

Chinese stocks had more than doubled over the last year, fueled in large part by retail investors using borrowed money to bet on shares.

"This is happening against an (economic) growth backdrop that continues to look soft, as illustrated by the flat manufacturing survey this week," noted analysts at Barclays.

The turmoil in China's stock markets has also pulled down some commodities, which are sensitive to Chinese demand.

Iron ore futures into China .IO62-CNI=SI have dropped almost 15 percent since mid-June and at $55.80 a tonne were not far above their historic lows of just below $47 that they hit in April, while Chinese steel prices SRBcv1 hit at least 6-year lows of just over 2,100 yuan this week.

The retreat also comes amid booming supply of iron ore, with Australian shipments from Port Hedland hitting record highs in June. The long decline in iron ore prices has been a major blow to profits and incomes in Australia as the mineral is its single biggest export earner.

Beijing has been struggling since the weekend to find a policy formula that would restore confidence to its stock markets.

So far, rapid fire steps including easing monetary policy, encouraging more pension funds to invest in stocks and cutting transaction costs have failed to stem the rout.

The CSRC has also relaxed rules on using borrowed money to speculate on stock markets, letting brokerages set their own tolerance level on margin calls and allowing the roll-over of margin lending contracts.

On Friday, the regulator also said it would step up its monitoring of markets to protect investors against the mis-selling of investment products.

China is due to release second-quarter gross domestic product data on July 15 and many economists expect growth to dip below 7 percent, which would be the weakest performance since the global financial crisis.